Piecemeal approach to economic reform

The Indian government has recently proposed two policy initiatives that have captured attention. One is innovative in legislative implementation though not in concept, the other seems conceptually more novel at first sight, but may just differ in scale and scope. Both illustrate a well recognised piecemeal approach to reform that needs to change. They indicate a paternalistic approach to India’s governance that has not changed with liberalisation, but which must be confronted and reassessed.

The first initiative is the proposed Employment Guarantee Act (EGA), which says that “every household in the rural areas of India shall have a right to at least 100 days of guaranteed employment every year for at least one adult member, for doing casual manual labour at the statutory minimum wage...”. The second is the Planning Commission’s proposal to tap forex reserves for financing infrastructure investment. Both initiatives address a critical need: we must do more for India’s poorest, and we must have better infrastructure to grow faster. Both have worthy goals. Given India’s intellectual talent and free media, both have been debated extensively. What more is there to add?

Begin with the infrastructure initiative. The debate has focused on the degree of import intensity of the spending, and whether that issue is relevant (the answer is, “not really,” as long as the private sector, instead of the government, imports more). Questions have been raised about the appropriate level of forex reserves, the impact of a higher fiscal deficit, and the underlying constraints on infrastructure development. China and Taiwan have been held up as successful examples of using forex reserves creatively.

Surprisingly, some of the questions revolve around facts about the economy and policy responses that the Planning Commission, even after 50 years of model building, does not seem equipped to deal with. As TN Srinivasan and I argued in an EPW article last June, having an adequate model of the economy, integrating its real and financial aspects, would allow a discussion that goes beyond airing opinions. It would allow one to compare alternative options, and search for policy mixes that might be closer to optimal and a more serious comparison with other economies.

Some questions about policies for infrastructure investment come to mind. Is the Planning Commission saying the RBI’s current level of accumulated reserves is too high? Was the RBI wrong? Is the difference between the two organisations one of goals or of

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